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Congress and the Control of Fiscal Policy
Sanford-Green text Chapter 10
The First Federal Budget
George Washington, President Alexander Hamilton, Secretary of the
Treasury Hamilton designed the first federal budget
Budget Growth
In the 1790s, the US population was about 4 million (4,000,000)
The federal budget was less than $6 million ($6,000,000) That’s about $1.50 per person
Budget Growth
The US population today is over 300 million (315,432,505 as of 3/4/13 at 9:00 AM local time)
The current federal budget is about $3,540,604,513,937 ($3.5 trillion)
That’s $11,240 per person
Sources of Revenue
For the first hundred years (or so) of the republic, tariffs (taxes on imports) provided most of the revenue for operating the federal government
Then citizens’ expectations rose as to what they wanted the federal government to do
The budget increased accordingly
Sources of Revenue
Until 1913 (16th Amendment), personal incomes could not be taxed
Income taxes now provide about 45% of the revenue to the federal government
Payroll taxes paid by employers provide another 35%
Other Sources of Revenue
Social Security taxes Corporate income taxes Excise taxes Estate and gift taxes Customs taxes
Limits on Congressional power to impose taxes
Congress may not impose taxes on goods exported from the United States
Congress must tax people uniformly in every state
The purpose of imposing taxes is to provide revenue for government operations
Taxation as an Instrument of Social Policy
Taxes can also be used to guide social policy
Taxes can be used to discourage certain activities
For example . . . smoking, drinking alcohol, driving big cars
“The power to tax is the power to destroy” (Chief Justice John Marshall)
Collecting Taxes
The Internal Revenue Service (IRS) collects taxes
The US has a “voluntary” income tax system
Congress and the IRS are always working to close “loopholes”
However, tax evasion is on the increase
Paying Taxes
People who make more than a certain amount of money are required to file an annual income tax return
Employers withhold what they estimate will be “enough” to pay the employees’ income taxes, based on information provided by the employees
Employers are required to send that money to the IRS in a timely way
Paying Taxes
Sometimes employers withhold too much money, and the employee gets a refund at tax time
Sometimes employers withhold too little money, and the employee must pay additional taxes at tax time
Some people make too little money to pay any income taxes at all.
Some of these people receive an “Earned Income Tax Credit” (EITC) when they file their return
The IRS uses sophisticated computer programs to verify the information provided in connection with taxes.
Who pays taxes?
Tax Year 2008
Percentiles Ranked by AGI AGI Threshold on Percentiles
Percentage of Federal Personal Income Tax
Paid
Top 1% $380,354 38.02
Top 5% $159,619 58.72
Top 10% $113,799 69.94
Top 25% $67,280 86.34
Top 50% $33,048 97.3
Bottom 50% <$33,048 2.7
Note: AGI is Adjusted Gross Income
Source: Internal Revenue Service
Where do Federal tax dollars go?
Almost since the beginning, the government has “borrowed” money to fund its operations
When the government spends more money than it takes in, this is called “deficit spending”
The accumulated deficits (the total “borrowed”) represent the national debt
Where do Federal tax dollars go?
The national debt has increased over the years
Sometimes faster than at other times The U S National debt is now about
$17,156,117,102,204.49 That’s about 102% of GDP (Gross Domestic
Product)
Other Expenditures
Some money goes to “other” federal operations
Maintenance of federal properties NASA Disaster relief Flood control Highway construction and maintenance
Paying interest on the national debt
The national debt is one factor in the dollar losing value relative to other currencies
It’s also a factor in inflation Higher prices, resulting from higher costs
of production, resulting from higher interest rates
Money is appropriated by Congress
“No money shall be drawn from the Treasury, but in consequence of appropriations made by law.”
The President proposes a budget to Congress Bills appropriating money must originate in the
House of Representatives Congress debates, amends, and passes the budget No money can be spent unless Congress
authorizes it
The Budget Process
Each federal department estimates how much money it will need for the coming year and submits a request
The OMB (Office of Management and Budget) reviews the requests, holds hearings, and prepares a budget proposal which is sent to the President
The President and his staff make changes and propose a budget to Congress
The Budget Process
Congressional committees review and revise the President’s proposal
The House and the Senate each pass their own version of the budget bill
A conference committee works out the differences and proposes a “compromise” version
Both House and Senate must eventually pass the same bill
This is supposed to be done by October 1 each year, but seldom is
The Budget Process
After final Congressional action, the appropriations bill (the budget) is sent back to the President
He can either sign it or veto it
Spending the money
Each federal department receives its funding through the GAO (General Accounting Office)
Problems Caused by the Appropriations Procedure
Short-term commitments Most agencies only receive funding one
year at a time This makes long-range planning difficult
Problems Caused by the Appropriations Procedure
Porkbarreling (AKA “earmarks”) Individual members of Congress try to get
money for “special projects” for their districts
Sometimes this is done for certain members in exchange for their vote for “earmarks” in another member’s district.
This sort of cooperation is sometimes called “logrolling”
Miscellaneous expenditures and Earmarks
Here are some examples of “pet projects”
Miscellaneous expenditures and Earmarks
Corporation for Public Broadcasting Subsidy ($445 million)
Save America 's Treasures Program ($25 million)
International Fund for Ireland ($17 million)
Legal Services Corporation ($420 million)
Miscellaneous expenditures and Earmarks
National Endowment for the Arts ($167.5 million)
National Endowment for the Humanities ($167.5 million)
Hope VI Program ($250 million)Amtrak Subsidies ($1.565 billion)
Miscellaneous expenditures and Earmarks
U.S. Trade Development Agency ($55 million)
Woodrow Wilson Center Subsidy ($20 million)
John C. Stennis Center Subsidy ($430,000)
Community Development Fund ($4.5 billion)
Miscellaneous expenditures and Earmarks
Heritage Area Grants and Statutory Aid ($24 million)
Essential Air Service ($150 million)Technology Innovation Program ($70
million)Manufacturing Extension Partnership
(MEP) Program ($125 million)
Miscellaneous expenditures and Earmarks
Department of Energy Grants to States for Weatherization ($530 million)
Beach Replenishment ($95 million)New Starts Transit ($2 billion)Exchange Programs for Alaska
Natives, Native Hawaiians, and Their Historical Trading Partners in Massachusetts ($9 million)
Miscellaneous expenditures and Earmarks
Intercity and High Speed Rail Grants ($2.5 billion)
Title X Family Planning ($318 million)Appalachian Regional Commission
($76 million)Economic Development
Administration ($293 million)
Miscellaneous expenditures and Earmarks
Programs under the National and Community Services Act ($1.15 billion)
Applied Research at Department of Energy ($1.27 billion)
Freedom CAR and Fuel Partnership ($200 million)
Energy Star Program ($52 million)
Miscellaneous expenditures and Earmarks
Economic Assistance to Egypt ($250 million)
U.S. Agency for International Development ($1.39 billion)
General Assistance to District of Columbia ($210 million)
Subsidy for Washington Metropolitan Area Transit Authority ($150 million)
Miscellaneous expenditures and Earmarks
Presidential Campaign Fund ($77 million)
Mohair Subsidies ($1 million)Subsidies to the United Nations
Intergovernmental Panel on Climate Change ($12.5 million)
Market Access Program ($200 million)
Miscellaneous expenditures and Earmarks
USDA Sugar Program ($14 million)Subsidy to Organization for Economic
Co-operation and Development (OECD) ($93 million)
National Organic Certification Cost-Share Program ($56.2 million)
Ready to Learn TV Program ($27 million)
Problems Caused by the Appropriations Procedure
The sheer complexity of the budget
The budget is so long and complicated (several hundred pages long) that almost no one can understand it completely
Congress influences the US Economy
Taxation to combat inflationTaxation to combat recessionTaxation to provide subsidies
and grants
Struggling to end the deficit
Andrew Jackson ended his term in 1836 with a budget surplus
Numerous attempts to balance the budget and end the deficit have not resulted in long-term success
The Federal Reserve SystemThe FDICInternational exchange ratesWorld Monetary Fund
Regulation of the Currency